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You’ve finally settled on the perfect new cell phone with all the latest features. You’ve chosen the accessories and picked a service plan. Now the salesperson asks if you want to buy insurance to protect your purchase.

It’s only $4.99 a month and you’ll be covered if the phone is lost, drops in the toilet or is run over by a car. So you say yes. Did you make the right decision?

Your new phone comes with a manufacturer’s warranty. But that only covers equipment failure caused by a defect or malfunction. You’re out of luck if the phone is lost, stolen, or accidentally damaged.

Dwight Moore with Verizon Wireless, says customers like cell phone insurance because they know if something happens to their phone, they’ll quickly have a replacement. In most cases, he says, it will arrive overnight and will be“exactly the same or similar” to the one you had.

“You can insure everygadget in your life if you want these days,” Daugherty says. “We think all this little insurance is just adding up to too much in many cases. People really ought to be focusing on the big risks.”

San Diego’s Utility Consumers’ Action Network (UCAN) also advises most consumers to skip cell phone insurance. UCAN’s Michael Shames tells me they get “lots of complaints” from people who did buy this coverage.

Some complain their replacement phone is used, what the industry calls “refurbished.” Others are surprised by the deductible, usually around $50.

Shames calls that “one of the dirty little secrets about phone insurance.”

Shames says insurance might make sense for some people — those who are prone to drop their phone, get it wet or somehow disable it. “It might be useful if you happen to work on building skyscrapers and you tend to drop your phone 30 or 40 stories,” he says.

It could also come in handy if you’re buying a high-end PDA phone that would cost you $500 or $600 to replace. Just remember, he says, “your replacement phone is likely used.”

An insurance nightmare
Justin Leavens, a businessman in Sherman Oaks, Calif., is one of those who complained to UCAN.

He purchased insurance coverage when he bought a fairly expensive phone from Verizon Wireless. “My cell phone is my lifeline,” he says. “So I couldn’t really be without it for more than a few days.”

Whenthe phone was damaged, Leavens filed a claim with the insurance company, Asurion, and was told he would have a replacement phone “the next day.” When it didn’t arrive, he called Asurion again and was told they didn’t have his phone in stock.His choices were: get on a waiting list or take a different phone that did not have the same features as the broken one.

Leavens says he suggested comparable phones that would make him happy, but the insurance company would not agree to that. He told them his local Verizon store had his phone. He offered to go pick one up ifthey would pay for it. Again, they said no.

“It really appeared like they were doing everything in their power to get out of paying for my cell phone,” he says.

Totally frustrated, Leavens went to the Verizon store and “basically begged for help.”

To make a very long story short, he says Verizon convinced the insurance company to pay for a new phone. Leavens picked it up right away, but he told me he had to wait 2-and-a-half months for his reimbursement check.

I made several requests for a comment from Asurion, but there was no response to my calls or emails.

The fine print
When it comes to insurance, it’s the actual policy that counts, not what you see in the colorful brochure or hear in the sales pitch. The policy is a contract between you and the insurance company, and these cell phone policies have numerous limitations and exclusions not spelled out in the sales material.

For instance, the policy for Cingular phones do not cover “normal wear and tear” or a cracked display “that does not affect the mechanical or electrical function of the unit.” And while the sales brochure promises, “a replacement is just a call away,” the policy is less generous. It says the company has the right to “repair or replace” the phone. That’s a big difference. And if they do send you a replacement, “colors, features and accessory compatibility are not guaranteed.”

Before making a decision, ask fora copy of the actual policy and see what it covers and what is excluded.

What should you do?
Say no to insurance coverageat the sales counter. Take some time to think about this purchase. You don’t have to make an impulse decision in the store. Cingular gives you 30 days. Verizon Wireless customers have 15 days to decide.

Consider what you’re really buying. While the transaction takes place through your wireless company, you are actually buying the policy from an independent third-party. If your claim is rejected, the wireless company may not be able to help.

Cell phone insurance is not like homeowners or auto insurance. With these policies if you have a covered loss, you get money from the insurance company. With phone insurance you get merchandise — a phone — instead of money.

And consider this. You can go online and get some great deals on used cell phones. If you lose or damage yours, it may be cheaper to simply buy a new one out of your own pocket with the money you didn’t spend on insurance.

Taking action
A class action lawsuit filed in Miami claims the insurance companies selling this coverage are using “deceptive and outrageous” practices. The suit contends the refurbished phones people get are worth less than the original phones.

MSNBC.com has learned a preliminary settlement has been reached in this case and will be presented to the court later this week. If approved, the settlement would affect as many as 13 million people who bought cell phone insurance.